D.c. Deals with Madoff Losses

December 19, 2008

If the economic downturn and plunging stock market weren’t bad enough, a number of Jewish organizations in the Washington area were smacked in the face with even worse news this week: A portion of their endowments had vanished, victim of the $50 billion Ponzi scheme of Bernard Madoff.

The organizations had placed those endowments in a communal fund under the control of the Jewish Federation of Greater Washington. Known as the United Jewish Endowment Fund, the pooled fund had more than $10 million of the $125 million it held at the end of last month invested with Madoff’s company. That means each organization was facing the loss of about 8 percent of any endowment money it was investing with the federation.

A person close to the federation said up to 15 local agencies had investments with the fund, including Jewish community centers, day schools and synagogues.

In addition, agencies are bracing for what one official described as a second wave — local donors whose wealth was decimated by Madoff. The scheme is believed to have dealt a devastating blow to the family foundation of Charles and Mary Kaplan, which funded the local Jewish demographic study in 2003.

According to the organization’s 2006 IRS Form 990, more than $29 million of the foundation’s $30 million in assets was placed in a â€œMadoff brokerage account.â€ The Kaplans are major annual donors to the federation and a multitude of other Jewish organizations in the community.

Irene Kaplan, the immediate past president of the Greater Washington federation, declined to comment when reached Monday, saying she had â€œnothing to add.â€ Her husband, Edward, the son of Charles and Mary Kaplan, also is a past president of the federation, as well as the United Jewish Endowment Fund.

Officials at the organizations that lost money in the communal endowment fund say that while they are interested in getting answers from the federation, they are much more concerned with the impact of the financial hit on the services they provide to the community.

The JCC of Greater Washington suffered one of the bigger hits. The JCC, in Rockville, Md., had its entire $5.5 million endowment invested with the fund and stands to lose more than $400,000.

Under existing rules the organization can draw 5 percent annually from its endowment fund for operating expenses, which means it now has $25,000 less to draw on this year. Those monies are needed to help pay for programs involving special needs, senior services and nutrition that don’t pay for themselves, according to chief operating officer Michael Feinstein.

For example, the Jewish Council for the Aging had 50 percent of its endowment invested with the communal fund, translating into a loss of approximately $50,000.

David Gamse, the Jewish Council for the Aging’s executive director, explained that his organization’s endowment rules allow 4 percent of its assets to be used each year, as long as the funds are above the level at which they were originally endowed by the donor. But with the tremendous losses already sustained this year in the market, the council’s endowment had already dipped below that level before the Madoff fraud was uncovered.

â€œEven if the economy turns around tomorrow,â€ Gamse said, â€œit’s going to take even longer, much longer, to get to stable ground on our endowment.â€

He added that new sources of revenue must be identified for expenses previously covered by endowment revenue — things that â€œaren’t sexyâ€ such as gas, maintenance and insurance for the organization’s bus transportation program.

â€œIt’s painful, very painful,â€ Gamse said. â€œIt means it adds yet another challenge to our operational fund raising at a time when fund raising is already down. We’re looking at saying ‘There’s no room at the inn’ to people with extreme needs.â€

The chief executive officer of the Washington DC JCC, Arna Meyer Mickelson, said her agency had the same dilemma with its endowment fund.

â€œIt puts all of our endowments under water, below historic levels,â€ she said, which means they are unable to take the interest from the funds that the facility has drawn on in past years.

Mickelson said that with less than a third of the center’s endowment invested in the federation’s fund, about $50,000 was lost.

A letter sent out by the Greater Washington federation late last week noted that the fund’s investment in Madoff was in line with its rule of a 10 percent maximum for any single fund manager. The document also stated that the United Jewish Endowment Fund had â€œengaged legal counsel to determine what funds may be recoverable and to pursue recovery.â€

The chair of the fund’s investment committee is Howard Schilit, who founded a firm — the Center for Financial Research and Analysis — that investigates the financial reports of companies. Schilit also wrote a book titled â€œFinancial Shenanigans: How to Detect Accounting Gimmicks and Fraud in Finance.â€ The federation did not make Schilit available to speak to reporters.

Some agency leaders said they were interested to get further disclosure from the federation, but weren’t blaming the United Jewish Endowment Fund for their losses. Mickelson noted that the UJEF had invested “aggressively” in the past and “we were happy when that was positive.”

Feinstein said that in light of the losses connected to Madoff, the JCC of Greater Washington would be reviewing its investment policy with the United Jewish Endowment Fund.

“We don’t have a place on their investment committee, we don’t know what due diligence was done,” he said. “We’re interested in finding out. We have to sort of re-evaluate what we can do.”

Feinstein acknowledged that the federation itself and many other organizations sustained similar losses. Still, he added, “It doesn’t make me feel any better that there was a lot of pain to go around.”